Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-20797
RUSH ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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Texas
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74-1733016 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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555 I.H. 35 South, Suite 500
New Braunfels, Texas 78130
(Address of principal executive offices)
(Zip Code)
(830) 626-5200
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicated below is the number of shares outstanding of each of the issuers classes of common
stock, as of August 5, 2011.
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Number of |
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Shares |
Title of Class |
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Outstanding |
Class A Common Stock, $.01 Par Value
Class B Common Stock, $.01 Par Value
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27,214,202
10,726,072 |
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
2
PART I. FINANCIAL INFORMATION
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Item 1. |
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Financial Statements. |
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2011 AND DECEMBER 31, 2010
(In Thousands, Except Shares)
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June 30, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
146,285 |
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$ |
168,976 |
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Accounts receivable, net |
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70,743 |
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43,513 |
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Inventories, net |
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451,887 |
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321,933 |
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Prepaid expenses and other |
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7,350 |
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14,104 |
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Deferred income taxes, net |
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11,025 |
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10,281 |
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Total current assets |
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687,290 |
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558,807 |
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Investments |
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6,628 |
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7,575 |
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Property and equipment, net |
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475,385 |
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445,919 |
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Goodwill, net |
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176,329 |
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150,388 |
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Other assets, net |
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4,668 |
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5,244 |
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Total assets |
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$ |
1,350,300 |
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$ |
1,167,933 |
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Liabilities and shareholders equity |
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Current liabilities: |
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Floor plan notes payable |
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$ |
352,551 |
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$ |
237,810 |
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Current maturities of long-term debt |
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57,933 |
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62,279 |
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Current maturities of capital lease obligations |
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8,935 |
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7,971 |
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Trade accounts payable |
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48,918 |
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37,933 |
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Accrued expenses |
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78,042 |
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69,036 |
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Total current liabilities |
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546,379 |
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415,029 |
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Long-term debt, net of current maturities |
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206,887 |
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189,850 |
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Capital lease obligations, net of current maturities |
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32,608 |
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34,231 |
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Other long-term liabilities |
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1,153 |
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364 |
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Deferred income taxes, net |
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72,452 |
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63,540 |
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Shareholders equity: |
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Preferred stock, par value $.01 per share;
1,000,000 shares authorized; 0 shares
outstanding in 2011 and 2010 |
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Common stock, par value $.01 per share;
60,000,000 class A shares and 20,000,000 class B
shares authorized; 27,155,861 class A shares and
10,725,472 class B shares outstanding in 2011;
and 26,798,707 class A shares and 10,700,044
class B shares outstanding in 2010 |
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395 |
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391 |
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Additional paid-in capital |
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202,940 |
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195,747 |
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Treasury stock, at cost: 1,639,843 class B shares |
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(17,948 |
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(17,948 |
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Retained earnings |
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306,736 |
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286,951 |
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Accumulated other comprehensive loss, net of tax |
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(1,302 |
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(222 |
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Total shareholders equity |
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490,821 |
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464,919 |
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Total liabilities and shareholders equity |
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$ |
1,350,300 |
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$ |
1,167,933 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2011 |
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2010 |
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2011 |
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2010 |
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Revenues: |
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New and used truck sales |
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$ |
466,585 |
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$ |
191,309 |
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$ |
744,115 |
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$ |
371,913 |
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Parts and service |
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170,387 |
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118,529 |
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315,947 |
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220,357 |
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Lease and rental |
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20,563 |
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16,255 |
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39,548 |
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30,287 |
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Finance and insurance |
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2,744 |
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2,047 |
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4,712 |
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3,532 |
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Other |
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1,703 |
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1,699 |
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3,764 |
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3,038 |
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Total revenue |
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661,982 |
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329,839 |
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1,108,086 |
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629,127 |
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Cost of products sold: |
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New and used truck sales |
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436,163 |
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174,817 |
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695,068 |
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341,163 |
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Parts and service |
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103,453 |
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72,222 |
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192,165 |
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134,851 |
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Lease and rental |
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16,856 |
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13,621 |
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32,953 |
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25,871 |
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Total cost of products sold |
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556,472 |
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260,660 |
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920,186 |
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501,885 |
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Gross profit |
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105,510 |
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69,179 |
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187,900 |
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127,242 |
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Selling, general and administrative |
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79,655 |
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55,148 |
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145,001 |
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105,285 |
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Depreciation and amortization |
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4,541 |
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3,676 |
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8,721 |
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7,223 |
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Gain (loss) on sale of assets |
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475 |
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7 |
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432 |
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(4 |
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Operating income |
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21,789 |
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10,362 |
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34,610 |
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14,730 |
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Interest expense, net |
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1,599 |
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1,397 |
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2,800 |
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2,694 |
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Income from continuing operations before taxes |
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20,190 |
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8,965 |
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31,810 |
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12,036 |
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Provision for income taxes |
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7,672 |
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3,549 |
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12,025 |
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4,698 |
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Income from continuing operations |
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12,518 |
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5,416 |
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19,785 |
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7,338 |
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Income from discontinued operations, net of tax |
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272 |
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587 |
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Net income |
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$ |
12,518 |
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$ |
5,688 |
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$ |
19,785 |
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$ |
7,925 |
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Earnings per common share Basic: |
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Income from continuing operations |
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$ |
.33 |
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$ |
.15 |
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$ |
.52 |
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$ |
.20 |
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Net income |
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$ |
.33 |
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$ |
.15 |
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$ |
.52 |
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$ |
.21 |
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Earnings per common share Diluted: |
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Income from continuing operations |
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$ |
.32 |
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$ |
.14 |
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$ |
.51 |
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$ |
.19 |
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Net income |
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$ |
.32 |
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$ |
.15 |
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$ |
.51 |
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$ |
.21 |
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Weighted average shares outstanding: |
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Basic |
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37,831 |
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37,292 |
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37,727 |
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37,232 |
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Diluted |
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39,015 |
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38,189 |
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38,929 |
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38,014 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
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Six Months Ended |
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June 30, |
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2011 |
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2010 |
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Cash flows from operating activities: |
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Net income |
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$ |
19,785 |
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$ |
7,925 |
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Adjustments to reconcile net income to net cash provided by operating
activities: |
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Depreciation and amortization |
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26,108 |
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21,312 |
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Gain on sale of property and equipment |
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(419 |
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(36 |
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Stock-based compensation expense related to stock options
and employee stock purchases |
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3,874 |
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2,902 |
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Provision for deferred income tax expense |
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8,824 |
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570 |
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Excess tax benefits from stock-based compensation |
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(1,145 |
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(209 |
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Change in accounts receivable, net |
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(26,966 |
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(11,354 |
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Change in inventories |
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(93,554 |
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(43,902 |
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Change in prepaid expenses and other, net |
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6,801 |
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743 |
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Change in trade accounts payable |
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10,985 |
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16,084 |
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Change in accrued expenses |
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9,696 |
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11,451 |
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Net cash (used in) provided by operating activities |
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(36,011 |
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5,486 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
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(60,805 |
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(28,558 |
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Proceeds from the sale of property and equipment |
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10,474 |
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123 |
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Business acquisitions |
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(60,038 |
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(32,450 |
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Change in other assets |
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537 |
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(1,996 |
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Net cash used in investing activities |
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(109,832 |
) |
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(62,881 |
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Cash flows from financing activities: |
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Draws on floor plan notes payable, net |
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114,741 |
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44,504 |
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Proceeds from long-term debt |
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45,943 |
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26,854 |
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Principal payments on long-term debt |
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(33,252 |
) |
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(24,806 |
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Principal payments on capital lease obligations |
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(7,562 |
) |
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(3,518 |
) |
Debt issuance costs |
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(41 |
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(73 |
) |
Excess tax benefits from stock-based compensation |
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1,145 |
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209 |
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Proceeds from issuance of shares relating to employee stock options and
employee stock purchases |
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2,178 |
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|
909 |
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Net cash provided by financing activities |
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123,152 |
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|
44,079 |
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Net decrease in cash and cash equivalents |
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(22,691 |
) |
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(13,316 |
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Cash and cash equivalents, beginning of period |
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168,976 |
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149,095 |
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Cash and cash equivalents, end of period |
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$ |
146,285 |
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$ |
135,779 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
6,713 |
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$ |
6,528 |
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Income taxes, net of refunds |
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$ |
(3,396 |
) |
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$ |
(3,147 |
) |
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Noncash investing activities: |
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Assets acquired under capital leases |
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$ |
6,903 |
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$ |
4,432 |
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|
The accompanying notes are an integral part of these consolidated financial statements.
5
RUSH ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 Principles of Consolidation and Basis of Presentation
The interim consolidated financial statements included herein have been prepared by Rush
Enterprises, Inc. and its subsidiaries (collectively referred to as the Company), without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). All adjustments have been made to the accompanying interim consolidated financial
statements, which, in the opinion of the Companys management, are necessary for a fair
presentation of the Companys operating results. All adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. It is recommended that these
interim consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Companys Annual Report on Form
10-K for the year ended December 31, 2010. Results of operations for interim periods are not
necessarily indicative of results that may be expected for any other interim periods or the
full fiscal year.
2 Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net
assets acquired in business combinations accounted for under the purchase method. The Company
does not amortize goodwill, but tests goodwill for impairment annually in the fourth quarter,
or when indications of potential impairment exist. These indicators would include a
significant change in operating performance, or a planned sale or disposition of a significant
portion of the business, among other factors. The Company tests for goodwill impairment
utilizing a fair value approach at the reporting unit level. A reporting unit is an operating
segment, for which discrete financial information is prepared and regularly reviewed by
segment management. The Company has deemed that its reporting unit is its operating segment,
the Truck segment, which is the level at which segment management regularly reviews operating
results and makes resource allocation decisions. The Construction Equipment segment is no
longer reported as a separate business segment because the Company sold its John Deere
construction equipment business in the third quarter of 2010. See Note 11 for further
discussion of the sale of the construction equipment business.
The impairment test for goodwill involves comparing the fair value of a reporting unit to
its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds
its fair value, a second step is required to measure the goodwill impairment loss. The second
step includes hypothetically valuing all the tangible and intangible assets and liabilities of
the reporting unit as if the reporting unit had been acquired in a business combination. Then,
the implied fair value of the reporting units goodwill is compared to the carrying amount of
that goodwill. If the carrying amount of the reporting units goodwill exceeds the implied
fair value of the goodwill, the Company would recognize an impairment loss in an amount equal
to the excess, not to exceed the carrying amount. The Company determines the fair values
calculated in an impairment test using the discounted cash flow method, which requires
assumptions and estimates regarding future revenue, expenses and cash flow projections. The
analysis is based upon available information regarding expected future cash flows of its
reporting unit discounted at rates consistent with the cost of capital specific to the
reporting unit.
Goodwill is tested for impairment during the fourth quarter of each year, or more
frequently when events or changes in circumstances indicate that the asset might be impaired,
and no impairment write down was required in the fourth quarter of 2010. However, the Company
cannot predict the occurrence of certain events that might adversely affect the reported value
of goodwill in the future. Such events may include, but are not limited to, the
discontinuance of operations by certain manufacturers the Company represents, strategic
decisions made in response to economic and competitive conditions or another significant
decrease in general economic conditions in the United States.
6
The following table sets forth the change in the carrying amount of goodwill for the
Company for the period ended June 30, 2011:
|
|
|
|
|
Balance December 31, 2010 |
|
$ |
150,388 |
|
Acquisition of Asbury Automotive Atlanta, L.L.C.(See Note 9) |
|
|
24,824 |
|
Acquisition of Heintzelmans Truck Center (See Note 9) |
|
|
1,050 |
|
Other |
|
|
67 |
|
|
|
|
|
Balance June 30, 2011 |
|
$ |
176,329 |
|
|
|
|
|
3 Commitments and Contingencies
The Company is contingently liable to finance companies for certain notes initiated on
behalf of such finance companies related to the sale of commercial vehicles. The majority of
finance contracts are sold without recourse against the Company. A majority of the Companys
liability related to finance contracts sold with recourse is generally limited to 5% to 20% of
the outstanding amount of each note initiated on behalf of the finance company. The Company
provides for an allowance for repossession losses and early repayment penalties that it may be
liable for under finance contracts sold without recourse.
The Company is involved in various claims and legal actions arising in the ordinary
course of business. The Company believes it is unlikely that the final outcome of any of the
claims or proceedings to which the Company is a party would have a material adverse effect on
the Companys financial position or results of operations; however, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any particular
claim or proceeding would not have a material adverse effect on the Companys results of
operations for the fiscal period in which such resolution occurred.
In 2006, the Company signed an agreement with Titan Technology Partners to implement SAP
enterprise software and a new SAP dealership management system. The cost of the SAP
software and implementation is estimated at approximately $41.0 million, of which $40.0
million was expended at June 30, 2011.
4 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
Income from continuing operations available to common
shareholders |
|
$ |
12,518,000 |
|
|
$ |
5,416,000 |
|
|
$ |
19,785,000 |
|
|
$ |
7,338,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
weighted average shares outstanding |
|
|
37,831,211 |
|
|
|
37,291,659 |
|
|
|
37,726,829 |
|
|
|
37,231,524 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and director stock options and
restricted share awards |
|
|
1,183,785 |
|
|
|
897,669 |
|
|
|
1,202,492 |
|
|
|
782,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted weighted
average shares outstanding and assumed conversions |
|
|
39,014,996 |
|
|
|
38,189,328 |
|
|
|
38,929,321 |
|
|
|
38,014,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings from continuing operations per common share |
|
$ |
.33 |
|
|
$ |
.15 |
|
|
$ |
.52 |
|
|
$ |
.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings from continuing operations per common share
and common share equivalents |
|
$ |
.32 |
|
|
$ |
.14 |
|
|
$ |
.51 |
|
|
$ |
.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of common stock that were outstanding for the three
months and six months ended June 30, 2011 and 2010 that were not included in the computation
of diluted earnings per share because the effect would have been anti-dilutive are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2011 |
|
Options |
|
|
498,600 |
|
|
|
990,330 |
|
|
|
498,600 |
|
|
|
990,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total anti-dilutive securities |
|
|
498,600 |
|
|
|
990,330 |
|
|
|
498,600 |
|
|
|
990,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
5 Stock Options and Restricted Stock Awards
Valuation and Expense Information
The Company accounts for stock-based compensation in accordance with Accounting Standards
Codification (ASC) 718-10, Compensation Stock Compensation, which requires the
measurement and recognition of compensation expense for all share-based payment awards made to
the Companys employees and directors including employee stock options, restricted share
awards and employee stock purchases related to the Employee Stock Purchase Plan based on
estimated fair values. Stock-based compensation expense, calculated using the Black-Scholes
option-pricing model and included in selling, general and administrative expense, was $1.3
million for the three months ended June 30, 2011, and $1.1 million for the three months ended
June 30, 2010. Stock-based compensation expense, included in selling, general and
administrative expense, for the six months ended June 30, 2011, was $3.9 million and for the
six months ended June 30, 2010, was $2.9 million. As of June 30, 2011, there was $9.0 million
of total unrecognized compensation cost related to non-vested share-based compensation
arrangements to be recognized over a weighted-average period of 3.5 years.
6 Financial Instruments and Fair Value
Certain methods and assumptions were used by the Company in estimating the fair value of
financial instruments at June 30, 2011. The carrying value of current assets and current
liabilities approximates the fair value due to the short maturity of these items.
The fair value of the Companys long-term debt is based on secondary market indicators.
Since the Companys debt is not quoted, estimates are based on each obligations
characteristics, including remaining maturities, interest rate, credit rating, collateral,
amortization schedule and liquidity. The carrying amount approximates fair value.
If investments are deemed to be impaired, the Company determines whether the impairment
is temporary or other than temporary. If the impairment is deemed to be temporary, the
Company records an unrealized loss in other comprehensive income. If the impairment is deemed
other than temporary, the Company records the impairment in the Companys consolidated
statement of operations.
In prior years, the Company invested in interest-bearing short-term investments primarily
consisting of investment-grade auction rate securities classified as available-for-sale and
reported at fair value. These types of investments were designed to provide liquidity through
an auction process that reset the applicable interest rates at predetermined periods ranging
from 1 to 35 days. This reset mechanism was intended to allow existing investors to continue
to own their respective interest in the auction rate security or to gain immediate liquidity
by selling their interests at par.
As a result of the liquidity issues experienced in the global capital markets, auctions
for investment grade securities held by the Company have failed. An auction fails when there
is insufficient demand. However, a failed auction does not represent a default by the issuer.
The auction rate securities continue to pay interest in accordance with the terms of the
underlying security; however, liquidity will be limited until there is a successful auction or
until such time as other markets for these investments develop. The Company has the intent
and ability to hold these auction rate securities until liquidity returns to the market. The
Company does not believe that the lack of liquidity relating to its auction rate securities
will have a material impact on its ability to fund operations.
As of June 30, 2011, the Company held auction rate securities with underlying tax-exempt
municipal bonds that mature in 2030 that have a fair value of $6.6 million and a cost basis of
$7.6 million. These bonds have credit wrap insurance and a credit rating of Aa3 by Moodys.
As of June 30, 2011, the Company has valued these investments at fair value. The Company
used observable inputs to determine fair value, including consideration of broker quotes, the
overall quality of the underlying municipality, the credit quality of the insurance company,
observable transactions, as well as successful subsequent auctions. Accordingly, the Company
has considered this fair value to be a Level 2 valuation under ASC 820-10, Fair Value
Measurements and Disclosures. The Company recorded a pre-tax impairment charge of $1.0
million on these investments as of June 30, 2011. The Company believes that the impairment is
temporary and has recognized the impairment in accumulated other comprehensive loss.
8
The table below presents disclosures about the financial instruments measured at fair value on
a recurring basis in the Companys financial statements as of June 30, 2011 and December 31, 2010
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2011 |
|
|
|
|
|
|
|
Fair Value Estimated Using |
|
|
|
Cost Basis |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
Amount |
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
Investment in auction rate securities |
|
$ |
7,575 |
|
|
$ |
|
|
|
$ |
6,628 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 |
|
|
|
|
|
|
|
Fair Value Estimated Using |
|
|
|
Cost Basis |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
Amount |
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
Investment in auction rate securities |
|
$ |
7,575 |
|
|
$ |
|
|
|
$ |
7,575 |
|
|
$ |
|
|
Interest Rate Swap Agreements
The Company has entered into swap agreements to hedge against the potential impact of
increases in interest rates on its floating-rate debt instruments. Swap agreements that hedge
exposures to changes in interest rates expose us to credit risk and market risk. Credit risk
is the potential failure of the counterparty to perform under the terms of the swap agreement.
The Company attempts to minimize this risk by entering into transactions with high-quality
counterparties. Market risk is the potential adverse effect on the value of the swap
agreement that results from a decline in interest rates. The market risk associated with
interest-rate contracts is managed by establishing and monitoring parameters that limit the
types and degree of market risk that may be undertaken.
At June 30, 2011, the Company had an aggregate $45.0 million notional amount of interest
rate swap contracts, which have been designated as cash flow hedges, to pay fixed rates of
interest and receive a floating interest rate based on LIBOR. The fixed interest rates
specified in the interest rate swap contracts become effective on or about January 1, 2012.
The Companys interest rate swaps qualify for cash flow hedge accounting treatment.
Unrealized gains or losses are recorded in accumulated other comprehensive loss. Realized
gains and losses will be recognized in interest expense, if they occur. Amounts to be received
or paid under the contracts will be recognized as interest expense over the life of the
contracts. The Company did not have any interest rate swap contracts in place as of June 30,
2010. There was no ineffectiveness for these swaps during the quarter ended June 30, 2011.
The fair value of cash flow swaps is calculated as the present value of expected future
cash flows, determined on the basis of forward interest rates and present value factors. As
such, the carrying amounts for these swaps are designated to be Level 2 fair values and
totaled $1.2 million as of June 30, 2011. The carrying value of these swaps is included in
Other Long-Term Liabilities on the accompanying Consolidated Balance Sheet as of June 30,
2011.
As of June 30, 2011, the Company was party to derivative financial instruments as
described in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
|
|
|
|
Agreement |
|
Amount |
|
|
Rate |
|
|
Expiration Date |
|
Fair Value |
|
Interest Rate Swap |
|
$ |
2,196 |
|
|
|
5.075 |
% |
|
July 1, 2015 |
|
$ |
(44 |
) |
Interest Rate Swap |
|
|
4,536 |
|
|
|
5.075 |
% |
|
July 1, 2015 |
|
|
(92 |
) |
Interest Rate Swap |
|
|
7,847 |
|
|
|
5.39 |
% |
|
December 31, 2014 |
|
|
(190 |
) |
Interest Rate Swap |
|
|
1,517 |
|
|
|
5.39 |
% |
|
December 31, 2014 |
|
|
(37 |
) |
Interest Rate Swap |
|
|
2,700 |
|
|
|
5.39 |
% |
|
December 31, 2014 |
|
|
(66 |
) |
Interest Rate Swap |
|
|
6,109 |
|
|
|
5.39 |
% |
|
December 31, 2014 |
|
|
(148 |
) |
Interest Rate Swap |
|
|
5,616 |
|
|
|
5.38 |
% |
|
June 29, 2015 |
|
|
(175 |
) |
Interest Rate Swap |
|
|
864 |
|
|
|
5.29 |
% |
|
June 30, 2015 |
|
|
(24 |
) |
Interest Rate Swap |
|
|
1,656 |
|
|
|
5.29 |
% |
|
June 30, 2015 |
|
|
(46 |
) |
Interest Rate Swap |
|
|
8,352 |
|
|
|
5.29 |
% |
|
June 30, 2015 |
|
|
(231 |
) |
Interest Rate Swap |
|
|
720 |
|
|
|
5.29 |
% |
|
June 30, 2015 |
|
|
(20 |
) |
Interest Rate Swap |
|
|
2,894 |
|
|
|
5.29 |
% |
|
June 30, 2015 |
|
|
(80 |
) |
9
Fair values of derivative instruments are on the accompanying Consolidated Balance Sheet as of June 30, 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated |
|
Asset Derivatives |
|
|
Liability Derivatives |
|
as Hedging Instruments |
|
Balance Sheet Location |
|
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
Other Long-Term Liabilities |
|
$ |
1,153 |
|
7 Segment Information
The Company currently has one reportable business segment, the Truck segment. The Truck
segment operates a network of commercial vehicle dealerships that provide an integrated
one-stop source for the commercial vehicle needs of its customers, including retail sales of
new and used commercial vehicles; aftermarket parts, service and body shop facilities; and a
wide array of financial services, including the financing of new and used commercial vehicle
purchases, insurance products and truck leasing and rentals. The commercial vehicle
dealerships are deemed as a single reporting unit because they have similar economic
characteristics. The Companys chief operating decision maker considers the entire Truck
segment, not individual dealerships when making decisions about resources to be allocated to
the segment and assess its performance.
The Construction Equipment segment is no longer reported as a separate business segment
because the Company sold the assets of its John Deere construction equipment business. See
Note 11 for further discussion of the sale of the construction equipment business. The assets
of the construction equipment business of $28.6 million have been included in the All Other
segment assets in the table below for the period ended June 30, 2010.
The Company evaluates performance based on income before income taxes not including
extraordinary items.
The Company accounted for intersegment sales and transfers as if the sales or transfers
were to third parties, that is, at current market prices. There were no material intersegment
sales during the quarters or six months ended June 30, 2011 and 2010.
The following table contains summarized information about reportable segment revenue,
segment income or loss from continuing operations and segment assets for the periods ended
June 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck |
|
|
|
|
|
|
|
|
|
Segment |
|
|
All Other |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
657,490 |
|
|
$ |
4,492 |
|
|
$ |
661,982 |
|
Segment income from continuing operations before taxes |
|
|
20,521 |
|
|
|
(331 |
) |
|
|
20,190 |
|
Segment assets |
|
|
1,324,548 |
|
|
|
25,752 |
|
|
|
1,350,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,099,630 |
|
|
$ |
8,456 |
|
|
$ |
1,108,086 |
|
Segment income (loss) from continuing operations
before taxes |
|
|
32,606 |
|
|
|
(796 |
) |
|
|
31,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
325,673 |
|
|
$ |
4,166 |
|
|
$ |
329,839 |
|
Segment income from continuing operations before taxes |
|
|
8,857 |
|
|
|
108 |
|
|
|
8,965 |
|
Segment assets |
|
|
1,049,053 |
|
|
|
53,480 |
|
|
|
1,102,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
621,431 |
|
|
$ |
7,696 |
|
|
$ |
629,127 |
|
Segment income (loss) from continuing operations
before taxes |
|
|
12,347 |
|
|
|
(311 |
) |
|
|
12,036 |
|
Revenues from segments below the quantitative thresholds are attributable to three
operating segments of the Company and are included in the All Other column. Those segments
include a retail tire company, an insurance
agency and a guest ranch operation. None of those segments has ever met any of the
quantitative thresholds for determining reportable segments.
10
8 Income Taxes
The Company included accruals for unrecognized income tax benefits totaling $1.5 million
as a component of accrued liabilities as of June 30, 2011, and December 31, 2010. The
unrecognized tax benefits of $1.5 million at June 30, 2011, if recognized, would impact the
Companys effective tax rate. An unfavorable settlement would require a charge to income tax
expense and a favorable resolution would be recognized as a reduction to income tax expense.
As of June 30, 2011, the Company has accrued interest of $130,000 related to unrecognized tax
benefits in the current provision for income taxes. No amounts were accrued for penalties.
The Company does not anticipate a significant change in the amount of unrecognized tax
benefits in the next 12 months. As of June 30, 2011, the tax years ended December 31, 2008
through 2010 remained subject to audit by federal tax authorities and the tax years ended
December 31, 2006 through 2010, remained subject to audit by state tax authorities.
9 Acquisitions
The following acquisitions were considered business combinations accounted for under ASC
805 Business Combinations. Pro forma information is not included in accordance with ASC 805
since no acquisitions were considered material individually or in the aggregate.
On March 14, 2011, the Company acquired certain assets of Asbury Automotive Atlanta
L.L.C., a subsidiary of Asbury Automotive Group, Inc., which operates commercial truck and bus
dealerships in the metro Atlanta area under the Nalley Motor Trucks name. The acquisition
includes the International, Hino, Isuzu, UD, IC Bus and Workhorse franchises in metro Atlanta,
dealership locations in Atlanta and Doraville and a collision center in Atlanta.
These locations are operating as Rush Truck Centers and offer commercial vehicles
manufactured by International, Hino, Isuzu, UD, IC Bus and Workhorse Custom Chassis in
addition to parts, service, body shop, financing and insurance capabilities. The
transaction was valued at approximately $55.3 million, with the purchase price paid in cash.
The operations of Nalley Motor Trucks are included in the accompanying consolidated financial
statements from the date of the acquisition. The preliminary purchase price was allocated
based on the fair values of the assets at the date of acquisition as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
June 30, |
|
|
|
2011 |
|
|
Adjustment |
|
|
2011 |
|
Inventory |
|
$ |
21,004 |
|
|
|
|
|
|
$ |
21,004 |
|
Property and equipment |
|
|
11,841 |
|
|
$ |
(1,970 |
) |
|
|
9,871 |
|
Prepaid expenses |
|
|
41 |
|
|
|
|
|
|
|
41 |
|
Accrued expenses |
|
|
(453 |
) |
|
|
|
|
|
|
(453 |
) |
Goodwill |
|
|
22,854 |
|
|
|
1,970 |
|
|
|
24,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,287 |
|
|
|
|
|
|
$ |
55,287 |
|
|
|
|
|
|
|
|
|
|
|
|
As the value of certain assets and liabilities are preliminary in nature, they are
subject to adjustment as additional information is obtained about the facts and circumstances
that existed at the acquisition date. When the valuation is final, any changes to the
preliminary valuation of acquired assets and liabilities could result in adjustments to
identified intangibles and goodwill. The adjustment to the purchase price allocation in the
current quarter relates to the finalization of real estate appraisals for property acquired.
All of the goodwill acquired in the Nalley Motor Trucks acquisition will be amortized over 15
years for tax purposes.
11
On February 21, 2011, the Company acquired certain assets of Heintzelmans Truck Center,
which consisted of a Ford commercial vehicle dealership in Orlando, Florida. The Company is
operating the facility as a full-service Rush Truck Center offering Ford trucks, parts,
service, leasing, financing and insurance. The transaction was valued at approximately $4.7
million, with the purchase price paid in cash. The operations of Heintzelmans Truck Center
are included in the accompanying consolidated financial statements from the date of the
acquisition. The preliminary purchase price was allocated based on the fair values of the
assets at the date of acquisition as follows (in thousands):
|
|
|
|
|
Inventory |
|
$ |
3,125 |
|
Accounts receivable |
|
|
264 |
|
Property and equipment |
|
|
221 |
|
Prepaid expenses |
|
|
6 |
|
Accrued expenses |
|
|
(2 |
) |
Goodwill |
|
|
1,050 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,664 |
|
|
|
|
|
As the value of certain assets and liabilities are preliminary in nature, they are
subject to adjustment as additional information is obtained about the facts and circumstances
that existed at the acquisition date. When the valuation is final, any changes to the
preliminary valuation of acquired assets and liabilities could result in adjustments to
identified intangibles and goodwill. All of the goodwill acquired in the Heintzelmans Truck
Center acquisition will be amortized over 15 years for tax purposes.
On May 24, 2010, the Company acquired certain assets of Lake City Companies, LLC and
certain of its subsidiaries and affiliates (collectively, Lake City International). The
transaction, including the real estate, was valued at approximately $71.0 million. The final
purchase price was allocated based on the fair values of the assets at the date of acquisition
as follows (in thousands):
|
|
|
|
|
Prepaid expenses |
|
$ |
205 |
|
Accounts and notes receivable |
|
|
5,955 |
|
Inventories |
|
|
10,722 |
|
Property and equipment, including real estate |
|
|
48,790 |
|
Other assets |
|
|
309 |
|
Accounts payable |
|
|
(175 |
) |
Accrued expenses |
|
|
(3,622 |
) |
Floor plan notes payable |
|
|
(275 |
) |
Notes payable |
|
|
(178 |
) |
Goodwill |
|
|
9,298 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,029 |
|
|
|
|
|
10 Comprehensive Income
The following table provides a reconciliation of net income to comprehensive income (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
12,518 |
|
|
$ |
5,688 |
|
|
$ |
19,785 |
|
|
$ |
7,925 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow swaps, net of tax |
|
|
(571 |
) |
|
|
|
|
|
|
(493 |
) |
|
|
|
|
Unrealized loss on available-for-sale securities,
net of tax |
|
|
(587 |
) |
|
|
|
|
|
|
(587 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
11,360 |
|
|
$ |
5,688 |
|
|
$ |
18,705 |
|
|
$ |
7,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 Discontinued Operations
On September 9, 2010, the Company sold the assets of its John Deere construction
equipment business, including its Rush Equipment Centers in Houston and Beaumont, Texas, to
Doggett Heavy Machinery Services, LLC. The results of operations of the construction
equipment business have been classified as discontinued operations in the Companys
consolidated statements of income, and excluded from business segment information.
12
Net sales and earnings before income taxes related to the discontinued business were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
|
|
|
$ |
9,102 |
|
|
$ |
|
|
|
$ |
18,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations from discontinued operations
before
income taxes |
|
|
|
|
|
|
469 |
|
|
|
|
|
|
|
1,012 |
|
Income tax (expense) |
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
(425 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
$ |
|
|
|
$ |
272 |
|
|
$ |
|
|
|
$ |
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share from discontinued
operations, net of tax |
|
$ |
|
|
|
$ |
.01 |
|
|
$ |
|
|
|
$ |
.01 |
|
Diluted earnings per common share and common share
equivalents from discontinued operations, net of tax |
|
$ |
|
|
|
$ |
.01 |
|
|
$ |
|
|
|
$ |
.01 |
|
12 New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) amended the guidance for the
presentation of comprehensive income. The amended guidance eliminates certain options for
presenting comprehensive income but does not change which components of comprehensive income are
recognized in net income or other comprehensive income. The amended guidance is intended to enhance
comparability between entities that report under generally accepted accounting principles and those
that report under international financial reporting standards. This guidance will be effective for
the Companys interim period ending March 31, 2012. The Company has determined that this new
guidance will not have a material impact on its consolidated financial statements.
13
|
|
|
ITEM 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations. |
Certain statements contained in this Form 10-Q (or otherwise made by the Company or on
the Companys behalf from time to time in other reports, filings with the Securities and
Exchange Commission, news releases, conferences, website postings or otherwise) that are not
statements of historical fact constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of
1934, as amended (the Exchange Act), notwithstanding that such statements are not
specifically identified. Forward-looking statements include statements about the Companys
financial position, business strategy and plans and objectives of management of the Company
for future operations. These forward-looking statements reflect the best judgments of the
Company about the future events and trends based on the beliefs of the Companys management as
well as assumptions made by and information currently available to the Companys management.
Use of the words may, should, continue, plan, potential, anticipate, believe,
estimate, expect and intend and words or phrases of similar import, as they relate to
the Company or its subsidiaries or Company management, are intended to identify
forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements reflect the current view of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual results to differ
materially from those in such statements. Important factors that could cause actual results to
differ materially from those in the forward-looking statements include, but are not limited
to, those set forth under Item 1ARisk Factors in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010 as well as future growth rates and margins for certain of
our products and services, future supply and demand for our products and services, competitive
factors, general economic conditions, cyclicality, market conditions in the new and used
commercial vehicle markets, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, distribution networks,
product introductions and acceptance, technological change, changes in industry practices,
one-time events and other factors described herein and in the Companys quarterly and other
reports filed with the Securities and Exchange Commission (collectively, Cautionary
Statements). Although the Company believes that its expectations are reasonable, it can give
no assurance that such expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those described in any
forward-looking statements. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly qualified in their
entirety by the applicable Cautionary Statements. All forward-looking statements speak only as
the date on which they are made and the Company undertakes no duty to update or revise any
forward-looking statements.
The following comments should be read in conjunction with the Companys consolidated
financial statements and related notes included elsewhere in this Quarterly Report on Form
10-Q.
Note Regarding Trademarks Used in This Form 10-Q
Peterbilt® is a registered trademark of Peterbilt Motors Company.
PACCAR® is a registered trademark of PACCAR, Inc. GMC® is a registered
trademark of General Motors Corporation. Hino® is a registered trademark of Hino
Motors, Ltd. UD® is a registered trademark of UD Truck North America, Ltd.
Isuzu® is a registered trademark of Isuzu Motors Limited. John Deere® is
a registered trademark of Deere & Company. Kenworth® is a registered trademark of
PACCAR, Inc. doing business as Kenworth Truck Company. Volvo® is a registered
trademark of Volvo Trademark Holding AB. Freightliner® is a registered trademark of
Freightliner Corporation. Mack® is a registered trademark of Mack Trucks, Inc.
Navistar® is a registered trademark of Navistar International Corporation.
Caterpillar® is a registered trademark of Caterpillar, Inc. PacLease® is
a registered trademark of PACCAR Leasing Corporation. CitiCapital® is a registered
trademark of Citicorp. Ford® is a registered trademark of Ford Motor Company.
Cummins® is a registered trademark of Cummins Intellectual Property, Inc.
Eaton® is a registered trademark of Eaton Corporation. Arvin Meritor®
is a registered trademark of Meritor Technology, Inc. JPMorgan Chase® is a
registered trademark of JP Morgan Chase & Co. SAP® is a registered trademark of
SAP Aktiengesellschaft. International® is a registered trademark of Navistar
International Transportation Corp. Blue Bird® is a registered trademark of Blue
Bird Investment Corporation. Autocar® is a registered trademark of Shem, LLC. IC
Bus® is a registered trademark of IC Bus, LLC. Collins Bus Corporation®
is a registered trademark of Collins Bus Corporation.
Fuso® is a registered
trademark of Mitsubishi Fuso Truck and Bus Corporation.
Workhorse® is a registered
trademark of Workhorse Custom Chassis, LLC.
General
Rush Enterprises, Inc. was incorporated in Texas in 1965 and consists of one reportable
segment, the Truck Segment. The Company conducts business through numerous subsidiaries, all
of which it wholly owns, directly or indirectly. Its principal offices are located at 555 IH
35 South, Suite 500, New Braunfels, Texas 78130.
14
The Company is a full-service, integrated retailer of commercial vehicles and related
services. The Truck Segment operates a regional network of commercial vehicle dealerships
under the name Rush Truck Centers. Rush Truck Centers primarily sell commercial vehicles
manufactured by Peterbilt, International, Hino, UD, Ford, Isuzu, Mitsubishi Fuso, IC Bus or
Blue Bird. Through its strategically located network of Rush Truck Centers, the Company
provides one-stop service for the needs of its commercial vehicle customers, including retail
sales of new and used commercial vehicles, aftermarket parts sales, service and repair
facilities, and financing, leasing and rental, and insurance products.
The Companys Rush Truck Centers are principally located in high traffic areas throughout
the United States. Since commencing operations as a Peterbilt heavy-duty truck dealer in
1966, the Company has grown to operate more than 60 Rush Truck Centers in Alabama, Arizona,
California, Colorado, Florida, Georgia, Idaho, New Mexico, North Carolina, Oklahoma, Oregon,
Tennessee, Texas and Utah.
Our business strategy consists of providing our customers with competitively priced
products supported with timely and reliable service through our integrated dealer network. We
intend to continue to implement our business strategy, reinforce customer loyalty and remain a
market leader by continuing to develop our Rush Truck Centers as we extend our geographic
focus through strategic acquisitions of new locations and expansions of our existing
facilities and product lines.
The Construction Equipment Segment will no longer be reported as a separate business
segment because the Company sold its John Deere construction equipment business in September
2010. Operating results of the Construction Equipment Segment have been classified as
discontinued operations in the financial statements and related discussion and analysis below.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of
operations are based on the Companys consolidated financial statements, which have been
prepared in accordance with United States generally accepted accounting principles. The
preparation of these consolidated financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. The Company believes the
following accounting policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined by
specific identification of new and used commercial vehicles and construction equipment
inventory and by the first-in, first-out method for tires, parts and accessories. As the
market value of our inventory typically declines over time, reserves are established based on
historical loss experience and market trends. These reserves are charged to cost of sales and
reduce the carrying value of our inventory on hand. An allowance is provided when it is
anticipated that cost will exceed net realizable value.
Goodwill
Goodwill and other intangible assets that have indefinite lives are not amortized but
instead are tested at least annually by reporting unit for impairment, or more frequently when
events or changes in circumstances indicate that the asset might be impaired.
Goodwill is reviewed for impairment utilizing a two-step process. The first step
requires the Company to compare the fair value of the reporting unit, which is the same as the
segment, to the respective carrying value. The Company considers its segment to be a
reporting unit for purposes of this analysis. If the fair value of the reporting unit exceeds
its carrying value, the goodwill is not considered impaired. If the carrying value is greater
than the fair value, there is an indication that an impairment may exist and a second step is
required. In the second step of the analysis, the implied fair value of the goodwill is
calculated as the excess of the fair value of a reporting unit over the fair values assigned
to its assets and liabilities. If the implied fair value of goodwill is less than the
carrying value of the reporting units goodwill, the difference is recognized as an impairment
loss.
15
The Company determines the fair value of its reporting unit using the discounted cash
flow method. The discounted cash flow method uses various assumptions and estimates regarding
revenue growth rates, future gross
margins, future selling, general and administrative expenses and an estimated weighted
average cost of capital. The analysis is based upon available information regarding expected
future cash flows of each reporting unit discounted at rates consistent with the cost of
capital specific to the reporting unit. This type of analysis contains uncertainties because
it requires the Company to make assumptions and to apply judgment regarding its knowledge of
its industry, information provided by industry analysts, and its current business strategy in
light of present industry and economic conditions. If any of these assumptions change, or
fails to materialize, the resulting decline in its estimated fair value could result in a
material impairment charge to the goodwill associated with the reporting unit.
Management is not aware of any impairment charge that may currently be required; however,
a change in economic conditions, if one occurs, could result in an impairment charge in future
periods.
The Company does not believe there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions it used to test for impairment losses
on goodwill. However, if actual results are not consistent with our estimates or assumptions,
or certain events occur that might adversely affect the reported value of goodwill in the
future, the Company may be exposed to an impairment charge that could be material. Such
events may include, but are not limited to, the discontinuance of operations by certain
manufacturers the Company represents, strategic decisions made in response to economic and
competitive conditions or the impact of the current economic environment.
Finance and Insurance Revenue Recognition
Finance income related to the sale of a unit is recognized when the finance contract is
sold to a finance company. The Company arranges financing for customers through various
institutions and receives financing fees from the lender equal to either the difference
between the interest rates charged to customers over the predetermined interest rates set by
the financing institution or a commission for the placement of contracts. The Company also
receives commissions from the sale of various insurance products to customers.
The Company may be charged back for unearned financing or insurance contract fees in the
event of early termination of the contracts by customers. In the case of finance contracts, a
customer may prepay, or fail to pay, thereby terminating the underlying contract. Revenues
from these fees are recorded at the time of the sale of a unit and a reserve for future
amounts which might be charged back is established based on historical chargeback results and
the termination provisions of the applicable contracts, including the impact of refinance and
default rates on retail finance contracts and cancellation rates on other insurance products.
The Companys finance and insurance revenue recognition accounting methodology contains
uncertainties because it requires management to make assumptions and to apply judgment to
estimate future charge-backs. The Companys estimate of future charge-backs is based
primarily on historical experience. The actual amount of historical charge-backs has not been
materially different than the Companys estimates.
Insurance Accruals
The Company is partially self-insured for a portion of the claims related to its property
and casualty insurance programs, requiring it to make estimates regarding expected losses to
be incurred. The Company engages a third party administrator to assess any open claims and
the Company adjusts its accrual accordingly on an annual basis. The Company is also partially
self-insured for a portion of the claims related to its workers compensation and medical
insurance programs. The Company uses actuarial information provided from third party
administrators to calculate an accrual for claims incurred, but not reported, and for the
remaining portion of claims that have been reported.
Changes in the frequency, severity, and development of existing claims could influence
the Companys reserve for claims and financial position, results of operations and cash flows.
The Company does not believe there is a reasonable likelihood that there will be a material
change in the estimates or assumptions it used to calculate its self-insured liabilities.
However, if actual results are not consistent with our estimates or assumptions, the Company
may be exposed to losses or gains that could be material.
Accounting for Income Taxes
Management judgment is required to determine the provisions for income taxes and to
determine whether deferred tax assets will be realized in full or in part. Deferred income
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or
settled. When it is more likely than not that all or some portion of specific deferred income
tax assets will not be realized, a valuation allowance must be established for the amount of
deferred income tax assets
that are determined not to be realizable. Accordingly, the facts and financial circumstances
impacting deferred income tax assets are reviewed quarterly and managements judgment is
applied to determine the amount of valuation allowance required, if any, in any given period.
16
The Companys income tax returns are periodically audited by tax authorities. These
audits include questions regarding our tax filing positions, including the timing and amount
of deductions. In evaluating the exposures associated with the Companys various tax filing
positions, the Company adjusts its liability for unrecognized tax benefits and income tax
provision in the period in which an uncertain tax position is effectively settled, the statute
of limitations expires for the relevant taxing authority to examine the tax position, or when
more information becomes available.
The Companys liability for unrecognized tax benefits contains uncertainties because
management is required to make assumptions and to apply judgment to estimate the exposures
associated with its various filing positions. The Companys effective income tax rate is also
affected by changes in tax law, the level of earnings and the results of tax audits. Although
the Company believes that the judgments and estimates are reasonable, actual results could
differ, and the Company may be exposed to losses or gains that could be material. An
unfavorable tax settlement generally would require use of the Companys cash and result in an
increase in its effective income tax rate in the period of resolution. A favorable tax
settlement would be recognized as a reduction in the Companys effective income tax rate in
the period of resolution. The Companys income tax expense includes the impact of reserve
provisions and changes to reserves that it considers appropriate, as well as related interest.
Stock-Based Compensation Expense
The Company applies the provisions of ASC 718-10, Compensation Stock Compensation,
which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors including grants of employee stock options and
restricted stock and employee stock purchases under the Employee Stock Purchase Plan based on
estimated fair values.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of
share-based payment awards on the date of grant. The value of the portion of the award that
is ultimately expected to vest is recognized as expense over the requisite service periods in
the Companys Consolidated Statement of Income.
Derivative Instruments and Hedging Activities
The Company utilizes derivative financial instruments to manage its interest rate risk.
The types of risks hedged are those relating to the variability of cash flows and changes in
the fair value of the Companys financial instruments caused by movements in interest rates.
The Company assesses hedge effectiveness at the inception and during the term of each hedge.
Derivatives are reported at fair value on the accompanying Consolidated Balance Sheets.
The effective portion of the gain or loss on the Companys cash flow hedges are reported
as a component of accumulated other comprehensive loss. Hedge effectiveness will be assessed
quarterly by comparing the changes in cumulative gain or loss from the interest rate swap with
the cumulative changes in the present value of the expected future cash flows of the interest
rate swap that are attributable to changes in the LIBOR rate. If the interest rate
swaps become ineffective, portions of these interest rate swaps would be reported as a
component of interest expense in the accompanying Consolidated Statements of Income.
17
Results of Operations
The following discussion and analysis includes the Companys historical results of
operations for the three months ended June 30, 2011 and 2010.
The following table sets forth certain financial data as a percentage of total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
New and used truck sales |
|
|
70.5 |
% |
|
|
58.0 |
% |
|
|
67.2 |
% |
|
|
59.1 |
% |
Parts and service |
|
|
25.7 |
|
|
|
36.0 |
|
|
|
28.5 |
|
|
|
35.0 |
|
Lease and rental |
|
|
3.1 |
|
|
|
4.9 |
|
|
|
3.6 |
|
|
|
4.8 |
|
Finance and insurance |
|
|
0.4 |
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.6 |
|
Other |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost of products sold |
|
|
84.1 |
|
|
|
79.0 |
|
|
|
83.0 |
|
|
|
79.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15.9 |
|
|
|
21.0 |
|
|
|
17.0 |
|
|
|
20.2 |
|
Selling, general and administrative |
|
|
12.0 |
|
|
|
16.8 |
|
|
|
13.1 |
|
|
|
16.7 |
|
Depreciation and amortization |
|
|
0.7 |
|
|
|
1.1 |
|
|
|
0.8 |
|
|
|
1.1 |
|
Gain on sale of assets |
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3.3 |
|
|
|
3.1 |
|
|
|
3.1 |
|
|
|
2.4 |
|
Interest expense, net |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
3.1 |
|
|
|
2.7 |
|
|
|
2.8 |
|
|
|
2.0 |
|
Provision for income taxes |
|
|
1.2 |
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
1.9 |
|
|
|
1.6 |
|
|
|
1.7 |
|
|
|
1.2 |
|
Income from discontinued operations |
|
|
0.0 |
|
|
|
0.1 |
|
|
|
0.0 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1.9 |
% |
|
|
1.7 |
% |
|
|
1.7 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the unit sales and revenue for new heavy-duty, new medium-duty,
new light-duty and used commercial vehicles and the absorption rate (revenue in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
% |
|
|
June 30, |
|
|
% |
|
|
|
2011 |
|
|
2010 |
|
|
Change |
|
|
2011 |
|
|
2010 |
|
|
Change |
|
Vehicle unit sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New heavy-duty vehicles |
|
|
2,363 |
|
|
|
813 |
|
|
|
190.7 |
% |
|
|
3,708 |
|
|
|
1,782 |
|
|
|
108.1 |
% |
New medium-duty vehicles |
|
|
1,514 |
|
|
|
795 |
|
|
|
90.4 |
% |
|
|
2,331 |
|
|
|
1,390 |
|
|
|
67.7 |
% |
New light-duty vehicles |
|
|
314 |
|
|
|
37 |
|
|
|
748.6 |
% |
|
|
426 |
|
|
|
53 |
|
|
|
703.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new vehicle unit sales |
|
|
4,191 |
|
|
|
1,645 |
|
|
|
154.8 |
% |
|
|
6,465 |
|
|
|
3,225 |
|
|
|
100.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used vehicles |
|
|
1,156 |
|
|
|
889 |
|
|
|
30.0 |
% |
|
|
2,263 |
|
|
|
1,575 |
|
|
|
43.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New heavy-duty vehicles |
|
$ |
300.5 |
|
|
$ |
104.7 |
|
|
|
187.0 |
% |
|
$ |
473.7 |
|
|
$ |
222.9 |
|
|
|
112.5 |
% |
New medium-duty vehicles |
|
|
107.3 |
|
|
|
49.4 |
|
|
|
117.2 |
% |
|
|
160.7 |
|
|
|
86.2 |
|
|
|
86.4 |
% |
New light-duty vehicles |
|
|
10.2 |
|
|
|
1.3 |
|
|
|
684.6 |
% |
|
|
14.2 |
|
|
|
1.8 |
|
|
|
688.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new vehicle revenue |
|
$ |
418.0 |
|
|
$ |
155.4 |
|
|
|
169.0 |
% |
|
$ |
648.6 |
|
|
$ |
310.9 |
|
|
|
108.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used vehicle revenue |
|
$ |
47.4 |
|
|
$ |
35.5 |
|
|
|
33.5 |
% |
|
$ |
93.8 |
|
|
$ |
60.1 |
|
|
|
56.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other vehicle revenue:(1) |
|
$ |
1.2 |
|
|
$ |
0.4 |
|
|
|
200.0 |
% |
|
$ |
1.7 |
|
|
$ |
0.9 |
|
|
|
88.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Absorption rate: |
|
|
112.9 |
% |
|
|
104.3 |
% |
|
|
8.2 |
% |
|
|
111.1 |
% |
|
|
100.8 |
% |
|
|
10.2 |
% |
|
|
|
(1) |
|
Includes sales of truck bodies, trailers and other new equipment. |
18
Key Performance Indicator
Absorption Rate
Management uses several performance metrics to evaluate the performance of its commercial
vehicle dealerships, and considers Rush Truck Centers absorption rate to be of critical
importance. Absorption rate is calculated by dividing the gross profit from the parts,
service and body shop departments by the overhead expenses of all of a dealerships
departments, except for the selling expenses of the new and used commercial vehicle
departments and carrying costs of new and used commercial vehicle inventory. When 100%
absorption is achieved, then gross profit from the sale of a commercial vehicle, after sales
commissions and inventory carrying costs, directly impacts operating profit. In 1999, the
Companys truck dealerships absorption rate was approximately 80%. The Company has made a
concerted effort to increase its absorption rate since 1999. The Companys truck dealerships
achieved a 112.9% absorption rate for the second quarter of 2011 and a 111.1% absorption rate
for the six months ended June 30, 2011.
Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010
Demand for the Companys product and service offerings remained strong in the second
quarter of 2011. The Company continues to expect 2012 and 2013 to be growth years for the
U.S. Class 8 truck industry. However, renewed economic concern and the possibility of slower
than expected recovery within automotive, manufacturing and construction sectors could result
in a more cautious Class 8 truck growth cycle, possibly extending the cycle over a longer
period of time with more gradual increases in truck sales. The Company continues to make
progress integrating its Mountain West and Southeast region dealerships into its Navistar
Division, now at 15 full service dealerships with 2 dedicated collision centers. The
acquisitions of these dealerships and collision centers, which occurred during 2010 and the
first quarter of 2011, produced a positive impact on revenue growth and net income this
quarter.
The Company increased deliveries of Class 8 trucks by 190.7% in the second quarter of
2011 compared to the second quarter of 2010. The Company and industry analysts expect a
strong recovery in commercial vehicle retail sales in 2011, 2012 and 2013. A.C.T. Research
Co., LLC (A.C.T. Research), a truck industry data and forecasting service provider,
currently predicts U.S. retail sales of Class 8 trucks of approximately 183,000 units in 2011,
and 243,500 units in 2012, compared to 110,109 units in 2010. The Company believes that if
U.S. Class 8 new truck orders continue at the pace set in recent months, 2011 U.S. Class 8
truck sales should reach approximately 180,000 units.
The Company increased deliveries of new medium-duty vehicles by 90.4% in the second
quarter of 2011, compared to the second quarter of last year. A.C.T. Research currently
predicts U.S. retail sales of Class 4, 5, 6, and 7 medium-duty commercial vehicles of
approximately 146,000 units in 2011, a 24.2% increase from the number of deliveries in 2010,
and 163,000 units in 2012.
The Companys overall parts, service and body shop sales increased 43.8% in the second
quarter of 2011 compared to the second quarter of 2010. The Company achieved a very strong
absorption rate of 112.9% for the quarter.
Revenues
Revenues increased $332.1 million, or 100.7%, in the second quarter of 2011 compared to
the second quarter of 2010. Sales of new and used commercial vehicles increased $275.3
million, or 143.9%, in the second quarter of 2011 compared to the second quarter of 2010.
Demand for commercial vehicles has increased as general economic conditions in the United
States have improved and credit is being made available on reasonable terms to a wider range
of buyers. Our parts, service and body shop revenues increased 43.8% in the second quarter of
2011 compared to 2010, primarily due to increased maintenance and repair as commercial vehicle
utilization continues to increase and acquisitions made by the Company in 2010 and the first
quarter of 2011.
The Company sold 2,363 heavy-duty trucks in the second quarter of 2011, a 190.7% increase
compared to 813 heavy-duty trucks in the second quarter of 2010. According to A.C.T.
Research, the U.S. Class 8 truck market increased 55.0% in the second quarter of 2011 compared
to the second quarter of 2010. The Companys share of the U.S. Class 8 truck retail sales
market was approximately 4.3% in 2010. The Company expects its market share to range between
4.5% and 5.0% of U.S. Class 8 truck sales in 2011. This market share percentage would result
in the sale of approximately 8,200 to 9,100 of Class 8 trucks in 2011 based on A.C.T.
Researchs current estimate that U.S. retail sales will increase to 183,000 units in 2011.
The Companys ability to sell this many trucks may be limited by
manufacturer and component suppliers ability to maintain or increase production over current
levels to meet customer demand.
19
The Company sold 1,514 medium-duty commercial vehicles, including 398 buses, in the
second quarter of 2011. This represented a 90.4% increase compared to 795 medium-duty
commercial vehicles, including 105 buses, in the second quarter of 2010. A.C.T. Research
estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S. increased
approximately 34.0% in the second quarter of 2011 compared to the second quarter of 2010. In
2010, the Company achieved a 2.5% share of the Class 4 through 7 commercial vehicle sales
market in the U.S. As a result of acquisitions that occurred during 2010 and the first
quarter of 2011, the Company expects its market share to range between 3.3% and 3.8% of U.S.
Class 4 through 7 commercial vehicle sales in 2011. This market share percentage would result
in the sale of approximately 4,800 to 5,500 of Class 4 through 7 commercial vehicles in 2011
based on A.C.T. Researchs current U.S. retail sales estimates of 146,000 units.
The Company sold 1,156 used commercial vehicles in the second quarter of 2011, a 30.0%
increase compared to 889 used commercial vehicles in the second quarter of 2010. The Company
expects to sell approximately 4,200 to 4,500 used commercial vehicles in 2011. The Company
expects used commercial vehicle sales to be largely dependent upon our ability to acquire
quality used commercial vehicles and maintain an adequate used commercial vehicle inventory
throughout 2011.
Parts and service sales increased $51.9 million, or 43.8%, in the second quarter of
2011 compared to the second quarter of 2010. As commercial vehicle utilization remains high,
the Company expects parts, service and body shop sales to continue to remain strong through
2011.
Truck lease and rental revenues increased $4.3 million, or 26.5%, in the second quarter
of 2011 compared to the second quarter of 2010. The increase in lease and rental revenue is
consistent with managements expectations, which are based upon the increased number of units
put into service in the lease and rental fleet during 2010 and increased rental fleet
utilization. The Company expects lease and rental revenue to increase 17% to 20% during 2011,
compared to 2010 based on the increase of units in the lease and rental fleet and the
acquisition of Lake City International in May 2010.
Finance and insurance revenues increased $0.7 million, or 34.0%, in the second quarter of
2011 compared to the second quarter of 2010. The increase in finance and insurance revenue is
a direct result of the increase in new and used commercial vehicle sales. The Company expects
finance and insurance revenue to fluctuate proportionately with the Companys new and used
commercial vehicle sales in 2011. Finance and insurance revenues have limited direct costs
and, therefore, contribute a disproportionate share of the Companys operating profits.
Other revenue remained flat at $1.7 million in the second quarter of 2011 and the second
quarter of 2010. Other revenue consists primarily of the gain on sale realized on trucks from
the lease and rental fleet, document fees related to commercial vehicle sales, mineral
royalties and purchase discounts.
Gross Profit
Gross profit increased $36.3 million, or 52.5%, in the second quarter of 2011, compared
to the second quarter of 2010. Gross profit as a percentage of sales decreased to 15.9% in
the second quarter of 2011 from 21.0% in the second quarter of 2010. This decrease in gross
profit as a percentage of sales is primarily a result of a change in our product sales mix.
Commercial vehicle sales, a lower margin revenue item, increased as a percentage of total
revenue to 70.5% in 2011, from 58.0% in 2010. Parts and service revenue, a higher margin
revenue item, decreased as a percentage of total revenue to 25.7% in 2011, from 35.9% in 2010.
Gross margins on Class 8 truck sales decreased to 6.7% in the second quarter of 2011,
from 8.1% in the second quarter of 2010. The decrease in gross margins is primarily related
to the increase in sales to fleet customers compared to the second quarter of 2010. In 2011,
the Company expects overall gross margins from Class 8 truck sales of approximately 6.5% to
7.5%.
Gross margins on medium-duty commercial vehicle sales decreased to 4.3% in the second
quarter of 2011, from 5.7% in the second quarter of 2010. Gross margins on medium-duty
commercial vehicles are difficult to forecast accurately because gross margins vary
significantly depending upon the mix of fleet and non-fleet purchasers and types of
medium-duty commercial vehicles sold. For 2011, the Company expects overall gross margins
from medium-duty commercial vehicle sales of approximately 5.5% to 6.2%, but this will largely
depend upon general economic conditions and the mix of purchasers and types of vehicles sold.
20
Gross margins on used commercial vehicle sales decreased to 10.2% in the second quarter
of 2011, from 14.7% in the second quarter of 2010. The Company expects margins on used
commercial vehicles to remain approximately 10.0% during 2011, but this will largely depend
upon general economic conditions and the availability of quality used vehicles.
Gross margins from the Companys parts, service and body shop operations increased to
39.3% in the second quarter of 2011, from 39.1% in the second quarter of 2010. Gross profit
for the parts, service and body shop departments increased to $66.9 million in the second
quarter of 2011 from $46.3 million in the second quarter of 2010. The Company expects gross
margins on parts, service and body shop operations to range from 39.0% to 41.0% in 2011.
Gross margins from truck lease and rental sales increased to 18.0% in the second quarter
of 2011, from 16.2% in the second quarter of 2010. The increase in lease and rental revenue
is primarily attributable to increased utilization of vehicles in the Companys rental fleet
and increased variable revenue that is based on the miles that leased vehicles are driven.
The Company expects gross margins from lease and rental sales of approximately 16.0% to 20.0%
during 2011. The Companys policy is to depreciate its lease and rental fleet using a
straight line method over the customers contractual lease term. The lease unit is
depreciated to a residual value that approximates fair value at the expiration of the lease
term. This policy results in the Company realizing reasonable gross margins while the unit is
in service and a corresponding gain or loss on sale when the unit is sold at the end of the
lease term.
Finance and insurance revenues and other income, as described above, have limited direct
costs and, therefore, contribute a disproportionate share of gross profit.
Selling, General and Administrative Expenses
Selling, General and Administrative (SG&A) expenses increased $24.5 million, or 44.4%,
in the second quarter of 2011, compared to the second quarter of 2010. SG&A expenses as a
percentage of total revenue decreased to 12.0% in the second quarter of 2011, from 16.7% in
the second quarter of 2010. SG&A expenses as a percentage of total revenue have historically
ranged from 10.0% to 15.0%. In general, when new and used commercial vehicle revenue
decreases as a percentage of revenue, SG&A expenses as a percentage of total revenue will be
at, or exceed, the higher end of this range. Historically low commercial vehicle revenue
during 2009 and early 2010, caused SG&A expenses as a percentage of sales to rise above this
range. For 2011, the Company expects SG&A expenses as a percentage of total revenue to range
from 12.0% to 15.0%. For 2011, the Company expects the selling portion of SG&A expenses to be
approximately 25% to 30% of new and used commercial vehicle gross profit. In 2011, the
Company expects the general and administrative portion of SG&A expenses to increase by
approximately 28.0% to 33.0% primarily due to an expected increase in personnel costs related
to increased parts and service business, the full year effect of acquisitions made in 2010 and
the first quarter of 2011, and the reinstatement of certain employee benefits. The Company
will incur additional costs of approximately $1.0 million per quarter related to
implementation of SAP software when it is placed in service in the third quarter of 2011.
These costs include monthly maintenance fees and training expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $0.9 million, or 23.5%, in the second
quarter of 2011 compared to the second quarter of 2010. The Company will incur additional
amortization expense of approximately $0.7 million per quarter related to implementation of
SAP software when it is placed in service in the third quarter of 2011.
Interest Expense, Net
Net interest expense increased $0.2 million, or 14.5%, in the second quarter of 2011
compared to the second quarter of 2010. The Companys floor plan agreement with GE Capital
was modified at the end of 2010, which increased interest rates related to floor plan notes
payable, however, net interest expense in 2011 will vary based on inventory levels and cash
available for prepayment of floor plan financing. The Company expects net interest expense to
increase by an additional amount of approximately $0.3 million per quarter when the SAP
software is placed in service in the third quarter of 2011, because the Company will no longer
capitalize interest on the costs related to the SAP software implementation.
21
Income from Continuing Operations before Income Taxes
As a result of the factors described above, income from continuing operations before
income taxes increased $11.2 million, or 125.2%, in the second quarter of 2011 compared to the
second quarter of 2010. The Company believes that income from continuing operations before
income taxes will increase in 2011 compared to 2010 because of the factors described above.
Income Taxes
Income taxes increased $4.1 million, or 116.2%, in the second quarter of 2011, compared
to the second quarter of 2010. The Company provided for taxes at a 38.0% effective rate in
the second quarter of 2011 compared to an effective rate of 42.0% in the second quarter of
2010. The Company expects its effective tax rate to be approximately 36.0% to 39.0% of pretax
income in 2011.
Income from Discontinued Operations, Net
Income from discontinued operations, net of income taxes decreased $0.3 million in the
second quarter of 2011 compared to the second quarter of 2010. Income from discontinued
operations includes operating results for the Companys construction equipment business, which
was sold in September 2010.
Six Months Ended June 30, 2011, Compared to Six Months Ended June 30, 2010
Unless otherwise stated below, the Companys variance explanations and future
expectations with regard to the items discussed in this section are set forth in the
discussion of the Three Months Ended June 30, 2011, Compared to Three Months Ended June 30,
2010.
Revenues increased $479.0 million, or 76.1%, in the first six months of 2011, compared to
the first six months of 2010. Sales of new and used trucks increased $372.2 million, or
100.1%, in the first six months of 2011, compared to the first six months of 2010.
The Company sold 3,708 heavy-duty trucks in the first six months of 2011, a 108.1%
increase compared to 1,782 heavy-duty trucks in the first six months of 2010. According to
A.C.T. Research, the U.S. Class 8 truck market increased 44.0% in the first six months of
2011, compared to the first six months of 2010.
The Company sold 2,331 medium-duty commercial vehicles, including 507 buses in the first
six months of 2011. This represented a 67.7% increase compared to 1,390 medium-duty
commercial vehicles, including 203 buses in the first six months of 2010. A.C.T. Research
estimates that unit sales of Class 4 through 7 commercial vehicles in the U.S increased
approximately 25.0% in the first six months of 2011, compared to the first six months of 2010.
The Company sold 2,263 used commercial vehicles in the first six months of 2011, a 43.7%
increase compared to 1,575 used commercial vehicles in the first six months of 2010.
Parts and service sales increased $95.6 million, or 43.4%, in the first six months of
2011, compared to the first six months of 2010.
Truck lease and rental revenues increased $9.3 million, or 30.6%, in the first six months
of 2011, compared to the first six months of 2010.
Finance and insurance revenues increased $1.2 million, or 33.4%, in the first six months
of 2011, compared to the first six months of 2010.
Other revenue increased $0.7 million, or 23.9%, in the first six months of 2011, compared
to the first six months of 2010. Other revenue consists primarily of the gain on sale
realized on trucks from the lease and rental fleet, document fees related to commercial
vehicle sales, mineral royalties and purchase discounts.
22
Gross Profit
Gross profit increased $60.7 million, or 47.7%, in the first six months of 2011, compared
to the first six months of 2010. Gross profit as a percentage of sales decreased to 17.0% in
the first six months of 2011 from 20.2% in the first six months of 2010.
Gross margins on Class 8 truck sales decreased to 6.6% in the first six months of 2011,
from 7.6% in the first six months of 2010.
Gross margins on medium-duty commercial vehicle sales decreased to 4.4% in the first six
months of 2011, from 5.9% in the first six months of 2010.
Gross margins on used commercial vehicle sales decreased to 10.1% in the first six months
of 2011, from 14.3% in the first six months of 2010.
Gross margins from the Companys parts, service and body shop operations increased to
39.2% in the first six months of 2011, from 38.8% in the first six months of 2010. Gross
profit for the parts, service and body shop departments was $123.8 million in the first six
months of 2011, compared to $85.5 million in the first six months of 2010.
Gross margins from truck lease and rental sales increased to 16.7% in the first six
months of 2011, from approximately 14.6% in the first six months of 2010.
Finance and insurance revenues and other income, as described above, has limited direct
costs and, therefore, contributes a disproportionate share of gross profit.
Selling, General and Administrative Expenses
SG&A expenses increased $39.7 million, or 37.7%, in the first six months of 2011,
compared to the first six months of 2010. SG&A expenses as a percentage of sales was 13.1% in
the first six months of 2011 and 16.7% in the first six months of 2010.
Interest Expense, Net
Net interest expense increased $0.1 million, or 3.9%, in the first six months of 2011,
compared to the first six months of 2010.
Income from Continuing Operations before Income Taxes
Income from continuing operations before income taxes increased $19.8 million in the
first six months of 2011, compared to the first six months of 2010.
Provision for Income Taxes
Income taxes increased $7.3 million in the first six months of 2011, compared to the
first six months of 2010. The Company provided for taxes at a 38.0% rate in the first six
months of 2011, compared to a rate of 42.0% in the first six months of 2010.
Income from Discontinued Operations, net
Income from discontinued operations, net of income taxes decreased $0.6 million in the
second quarter of 2011 compared to the second quarter of 2010. Income from discontinued
operations includes operating results for the Companys construction equipment business, which
was sold in September 2010.
Liquidity and Capital Resources
The Companys short-term cash requirements are primarily for working capital, inventory
financing, the improvement and expansion of existing facilities, the development and
implementation of SAP enterprise software and dealership management system, and the
construction or purchase of new facilities. Historically, these cash requirements have been
met through the retention of profits, borrowings under our floor plan arrangements and bank
financings. The Company does not expect the absence of cash flows from discontinued operations
to materially affect future liquidity and capital resources. As of June 30, 2011, the Company
had working capital of approximately
$140.9 million, including $146.3 million in cash available to fund our operations. The
Company believes that these funds are sufficient to meet our operating requirements for at
least the next twelve months.
23
Available cash is generally invested in variable interest rate instruments in accordance
with the Companys investment policy which is to invest excess funds in a manner that will
provide maximum preservation and safety of principal. The portfolio is maintained to meet
anticipated liquidity needs of the Company in order to ensure the availability of cash to meet
the Companys obligations and to minimize potential liquidation losses. As of June 30, 2011,
the majority of excess cash is maintained in a depository account or invested in a money
market fund that invests exclusively in U.S. Treasury bills, notes and other obligations
issued or guaranteed by the U.S. Treasury, and repurchase agreements collateralized by such
obligations.
The Company has a secured line of credit that provides for a maximum borrowing of $10.0
million. There were no advances outstanding under this secured line of credit at June 30,
2011, however, $7.1 million was pledged to secure various letters of credit related to
self-insurance products, leaving $2.9 million available for future borrowings as of June 30,
2011.
The Companys long-term real estate debt agreements and floor plan credit agreement
require the Company to satisfy various financial ratios such as the debt to worth ratio,
leverage ratio and the fixed charge coverage ratio and certain requirements for tangible net
worth and GAAP net worth. At June 30, 2011, the Company was in compliance with all debt
covenants related to debt secured by real estate and its floor plan credit agreement. The
Company does not anticipate any breach of the covenants in the foreseeable future.
Titan Technology Partners is currently implementing SAP enterprise software and a new SAP
dealership management system for the Company. The total cost of the SAP software and
implementation is estimated to be approximately $41.0 million. As of June 30, 2011, the
Company had cumulative expenditures of $40.0 million related to the SAP project. The Company
expects to spend approximately $1.0 million related to the SAP project during the remainder of
2011. The Company plans to place in service the SAP software during the third quarter of
2011.
The Company expects to purchase or lease trucks worth approximately $75.0 million for its
leasing operations in 2011, depending on customer demand, all of which will be financed. The
Company also expects to make capital expenditures for recurring items such as computers, shop
tools and equipment and vehicles of approximately $7.0 million to $9.0 million during the
remainder of 2011.
The Company currently anticipates funding its capital expenditures relating to the
implementation of the SAP enterprise software and SAP dealership management system,
improvement and expansion of existing facilities and recurring expenses, as well as a portion
of the construction or purchase of new facilities through its operating cash flow. The
Company expects to finance 70% to 80% of the appraised value of any newly constructed or
purchased facilities, which will increase the Companys cash and cash equivalents by that
amount.
The Company has no other material commitments for capital expenditures as of June 30,
2011, except that the Company will continue to purchase vehicles for its lease and rental
division and authorize capital expenditures for improvement and expansion of its existing
dealership facilities and construction or purchase of new facilities based on market
opportunities.
Cash Flows
Cash and cash equivalents decreased by $22.7 million during the six months ended June 30,
2011 and decreased by $13.3 million during the six months ended June 30, 2010. The major
components of these changes are discussed below.
Cash Flows from Operating Activities
Cash flows from operating activities include net income adjusted for non-cash items and
the effects of changes in working capital. During the first six months of 2011, operating
activities resulted in net cash used in operations of $36.0 million. Cash used in operating
activities was primarily impacted by the increase in inventories and accounts receivable which
was offset by the increase in accounts payable and accrued expenses. During the first six
months of 2010, operating activities resulted in cash provided by operations of $5.5 million.
24
Cash flows from operating activities as adjusted for all draws on floor plan notes,
except for floor plan related to inventory acquired in business acquisitions, (Adjusted Cash
Flows from Operating Activities) was $65.5
million for the six months ended June 30, 2011, and $50.0 million for the six months ended
June 30, 2010. Generally, all vehicle dealers finance the purchase of vehicles with floor
plan borrowings. Our agreements with our floor plan provider require us to repay amounts
borrowed for the purchase of such vehicles immediately after they are sold. As a result,
changes in floor plan notes payable are directly linked to changes in vehicle inventory.
However, as reflected in our consolidated statements of cash flows, changes in inventory are
recorded as cash flows from operating activities if such inventory is procured in the normal
course of business, or as cash flows from investing activities if such inventory is procured
as part of a business acquisition, while all draws on floor plan notes are recorded as cash
flows from financing activities.
Management believes that information about Adjusted Cash Flows from Operating Activities
provides investors with a relevant measure of liquidity and a useful basis for assessing the
Companys ability to fund its activities and obligations from operating activities. Floor
plan notes payable is classified as a current liability and, therefore, is included in the
working capital amounts discussed above.
Adjusted Cash Flows from Operating Activities is a non-GAAP financial measure and should
be considered in addition to, and not as a substitute for, cash flows from operating
activities as reported in our consolidated statements of cash flows in accordance with U.S.
GAAP. Additionally, this measure may vary among other companies; thus, Adjusted Cash Flows
from Operating Activities as presented herein may not be comparable to similarly titled
non-GAAP financial measures of other companies. Set forth below is a reconciliation of cash
flow from operating activities as reported in our consolidated statement of cash flows, as if
all changes in floor plan notes payable, except floor plan changes related to acquisitions,
were classified as an operating activity (in thousands).
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Net cash (used in) provided by operating activities (GAAP) |
|
$ |
(36,012 |
) |
|
$ |
5,486 |
|
Draws on floor plan notes payable |
|
|
114,741 |
|
|
|
44,504 |
|
Less: draws on floor plan notes payable related to inventory acquired in
business acquisitions |
|
|
(13,250 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Cash Flows from Operating Activities (Non-GAAP) |
|
$ |
65,479 |
|
|
$ |
49,990 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
Cash flows used in investing activities consist primarily of cash used for capital
expenditures and business acquisitions. During the first six months of 2011, cash used in
investing activities was $109.8 million. Capital expenditures consisted of purchases of
property and equipment and improvements to our existing dealership facilities of $60.8
million. Property and equipment purchases during the first six months of 2011 consisted of
$30.4 million for additional units for rental and leasing operations, which was directly
offset by borrowings of long-term debt, $16.0 million for transportation equipment and $4.5
million related to the SAP software implementation, including capitalized interest. The
Company expects to purchase or lease trucks worth approximately $75.0 million for its leasing
operations in 2011, depending on customer demand, all of which will be financed. Cash used in
business acquisitions was $60.0 million during the first six months of 2011 (See Note 9 -
Acquisitions of Notes to Consolidated Financial Statements). During the remainder of 2011,
the Company expects to make capital expenditures for recurring items such as computers, shop
equipment and vehicles of approximately $7.0 million to $9.0 million, in addition to
approximately $1.0 million for the SAP project described above.
During the first six months of 2010, cash used in investing activities was $62.9 million.
Capital expenditures consisted of purchases of property and equipment and improvements to our
existing dealership facilities of $28.6 million. Property and equipment purchases during the
first six months of 2010 consisted of $17.9 million for additional units for rental and
leasing operations, which was directly offset by borrowings of long-term debt. Cash used in
business acquisitions was $32.5 million during the first six months of 2010 (See Note 9 -
Acquisitions of Notes to Consolidated Financial Statements).
Cash Flows from Financing Activities
Cash flows from financing activities include borrowings and repayments of long-term debt
and net proceeds of floor plan notes payable. Cash provided by financing activities was
$123.2 million during the first six months of 2011. The Company had borrowings of long-term
debt of $45.9 million and repayments of long-term debt of $33.3 million and repayments of
capital lease obligations of $7.6 million during the first six months of 2011. The Company
had net draws on floor plan notes payable of $114.7 million during the first six months of
2011. The borrowings of long-term debt were primarily related to units for the rental and
leasing operations.
25
Cash provided by financing activities was $44.1 million during the first six months of
2010. The Company had borrowings of long-term debt of $26.9 million and repayments of
long-term debt of $24.8 million during the first six months of 2010. The Company had net
draws on floor plan notes payable of $44.5 million during the first six months of 2010. The
borrowings of long-term debt were primarily related to units for the rental and leasing
operations.
Substantially all of the Companys commercial vehicle purchases are made on terms
requiring payment within 15 days or less from the date the commercial vehicles are invoiced
from the factory. We financed substantially all of the purchases of commercial vehicle
inventory under our $450.0 million credit agreement with GE Capital. All principal amounts
outstanding bear interest at a rate per annum equal to the sum of the LIBOR rate plus 2.95%,
which is payable monthly. The credit agreement allows for prepayment of the inventory loans,
up to 65% of the aggregate inventory loans outstanding, with monthly adjustments to the
interest due. The Company makes monthly interest payments to GE Capital on the amount
financed, but is not required to commence loan principal repayments on any vehicle until such
vehicle has been financed for 12 months or is sold. On June 30, 2011, the Company had
approximately $340.9 million outstanding under its credit agreement with GE Capital.
Navistar Financial Corporation offers a floor plan program that provides an interest free
financing period, which varies depending on the commercial vehicle purchased. If the
commercial vehicle financed by Navistar is not sold within the interest free finance period,
the Company transfers the financed commercial vehicle to the GE Capital credit agreement. On
June 30, 2011, the Company had approximately $11.6 million outstanding under the floor plan
program with Navistar Financial Corporation.
Backlog
On June 30, 2011, the Companys backlog of commercial vehicle orders was approximately
$705.7 million compared to a backlog of commercial vehicle orders of approximately $154.4
million on June 30, 2010. The Company includes only confirmed orders in its backlog. The
delivery time for a custom-ordered commercial vehicle varies depending on the truck
specifications and demand for the particular model ordered, however, the Company expects to
fill all of its backlog orders during 2011. The Company sells the majority of its new
commercial vehicles by customer special order, with the remainder sold out of inventory.
Orders from a number of the Companys major fleet customers are included in the Companys
backlog as of June 30, 2011.
Seasonality
The Companys Truck segment is moderately seasonal. Seasonal effects on new commercial
vehicle sales related to the seasonal purchasing patterns of any single customer type are
mitigated by the diverse geographic locations of our dealerships and the Companys diverse
customer base, including regional and national fleets, local governments, corporations and
owner operators. However, commercial vehicle parts and service operations historically have
experienced higher sales volumes in the second and third quarters.
Cyclicality
The Companys business is dependent on a number of factors relating to general economic
conditions, including fuel prices, interest rate fluctuations, credit availability, economic
recessions, environmental and other government regulations and customer business cycles. Unit
sales of new commercial vehicles have historically been subject to substantial cyclical
variation based on these general economic conditions. According to data published by A.C.T.
Research, in recent years total U.S. retail sales of new Class 8 trucks have ranged from a low
of approximately 97,000 in 2009 to a high of approximately 291,000 in 2006. Through
geographic expansion, concentration on higher margin parts and service operations and
diversification of its customer base, the Company believes it has reduced the negative impact
on the Companys earnings of adverse general economic conditions or cyclical trends affecting
the heavy-duty truck industry.
Off-Balance Sheet Arrangements
Other than operating leases, the Company does not have any obligation under any
transaction, agreement or other contractual arrangement to which an entity unconsolidated with
the Company is a party that has or is reasonably likely to have a current or future effect on
the Companys financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that is material
to investors.
26
Environmental Standards and Other Governmental Regulations
The Company is subject to a wide range of federal, state and local environmental laws and
regulations, including those governing discharges into the air and water; the operation and
removal of underground and aboveground storage tanks; the use, handling, storage and disposal
of hazardous substances, petroleum and other materials; and the investigation and remediation
of contamination. As with commercial vehicle or construction equipment dealerships generally,
and service, parts and body shop operations in particular, our business involves the
generation, use, storage, handling and contracting for recycling or disposal of hazardous
materials or wastes and other environmentally sensitive materials. The Company has incurred,
and will continue to incur, capital and operating expenditures and other costs in complying
with such laws and regulations.
Our operations involving the management of hazardous and nonhazardous materials are
subject to the requirements of the federal Resource Conservation and Recovery Act, or RCRA,
and comparable state statutes. Pursuant to these laws, federal and state environmental
agencies have established approved methods for handling, storage, treatment, transportation
and disposal of regulated substances and wastes with which the Company must comply. Our
business also involves the operation and use of above ground and underground storage tanks.
These storage tanks are subject to periodic testing, containment, upgrading and removal under
RCRA and comparable state statutes. Furthermore, investigation or remediation may be
necessary in the event of leaks or other discharges from current or former underground or
aboveground storage tanks.
The Company may also have liability in connection with materials that were sent to
third-party recycling, treatment, or disposal facilities under the federal Comprehensive
Environmental Response, Compensation and Liability Act, or CERCLA, and comparable state
statutes. These statutes impose liability for investigation and remediation of contamination
without regard to fault or the legality of the conduct that contributed to the contamination.
Responsible parties under these statutes may include the owner or operator of the site where
contamination occurred and companies that disposed or arranged for the disposal of the
hazardous substances released at these sites. These responsible parties also may be liable
for damages to natural resources. In addition, it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage allegedly
caused by the release of hazardous substances or other pollutants into the environment.
The federal Clean Water Act and comparable state statutes prohibit discharges of
pollutants into regulated waters without the necessary permits, require containment of
potential discharges of oil or hazardous substances, and require preparation of spill
contingency plans. Water quality protection programs govern certain discharges from some of
our operations. Similarly, the federal Clean Air Act and comparable state statutes regulate
emissions of various air pollutants through air emissions permitting programs and the
imposition of other requirements. In addition, the U.S. Environmental Protection Agency, or
EPA, has developed, and continues to develop, stringent regulations governing emissions of
toxic air pollutants from specified sources.
In 2010, the EPA and the U.S. Department of Transportation (DOT) announced the first
national standards to reduce greenhouse gas (GHG) emissions and improve fuel efficiency of
heavy-duty trucks and buses. This comprehensive national program is projected to reduce GHG
emissions by about 250 million metric tons and save 500 million barrels of oil over the lives
of the vehicles produced within the programs first five years.
EPA and DOTs National Highway Traffic Safety Administration are proposing new standards
for three categories of heavy trucks: combination tractors (the main power unit portion of a
tractor-trailer combined vehicle), heavy-duty pickups and vans, and vocational vehicles. The
categories were established to address specific challenges for manufacturers in each area. For
combination tractors, the agencies are proposing engine and vehicle standards that begin in
the 2014 model year and achieve up to a 20 percent reduction in carbon dioxide (CO2) emissions
and fuel consumption by 2018 model year.
For heavy-duty pickup trucks and vans, the agencies are proposing separate gasoline and
diesel truck standards, which phase in starting in the 2014 model year and achieve up to a 10
percent reduction for gasoline vehicles and 15 percent reduction for diesel vehicles by 2018
model year (12 and 17 percent respectively if accounting for air conditioning leakage).
Lastly, for vocational vehicles, the agencies are proposing engine and vehicle standards
starting in the 2014 model year which would achieve up to a 10 percent reduction in fuel
consumption and CO2 emissions by 2018 model year.
It is not possible at this time to accurately predict how the foregoing proposed
standards, future legislation or other new regulations that may be adopted to address
greenhouse gas emissions will impact our business. Any regulations will likely result in
increased compliance costs, additional operating restrictions or changes in demand for
our products and services, which could have a material adverse effect on our business,
financial condition and results of operation.
27
The Company believes that it does not currently have any material environmental
liabilities and that compliance with environmental laws and regulations will not, individually
or in the aggregate, have a material adverse effect on our results of operations, financial
condition or cash flows. However, soil and groundwater contamination is known to exist at
some of our current properties. Further, environmental laws and regulations are complex and
subject to change. In addition, in connection with acquisitions, it is possible that the
Company will assume or become subject to new or unforeseen environmental costs or liabilities,
some of which may be material. In connection with our dispositions, or prior dispositions made
by companies acquire, the Company may retain exposure for environmental costs and liabilities,
some of which may be material. Compliance with current or amended, or new or more stringent,
laws or regulations, stricter interpretations of existing laws or the future discovery of
environmental conditions could require additional expenditures by us, and those expenditures
could be material.
28
|
|
|
ITEM 3. |
|
Quantitative and Qualitative Disclosures about Market Risk. |
Market risk represents the risk of loss that may impact the financial position, results
of operations, or cash flows of the Company due to adverse changes in financial market prices,
including interest rate risk, and other relevant market rate or price risks.
The Company is exposed to some market risk through interest rates related to our floor
plan financing agreements, variable rate real estate debt and discount rates related to
finance sales. The majority of floor plan debt and variable rate real estate debt is based on
LIBOR. As of June 30, 2011, the Company had floor plan borrowings and variable interest rate
real estate debt of approximately $451.8 million. Assuming an increase or decrease in LIBOR
of 100 basis points, annual interest expense could correspondingly increase or decrease by
approximately $4.5 million. The Company provides all customer financing opportunities to
various finance providers. The Company receives all finance charges in excess of a negotiated
discount rate from the finance providers in the month following the date of the financing. The
negotiated discount rate is variable, thus subject to interest rate fluctuations. This
interest rate risk is mitigated by the Companys ability to pass discount rate increases to
customers through higher financing rates.
The Company is exposed to some market risk through interest rate swaps on some of the
Companys variable interest rate real estate debt. As of June 30, 2011, the Company has
interest rate swaps with a total notional amount of $45.0 million. The swaps were designed to
provide a hedge against changes in interest rates on some of the Companys variable interest
rate real estate debt. The swaps are collateralized by the underlying real estate. These
interest rate swaps qualify for cash flow hedge accounting treatment and are considered
effective. For additional information about the effect of the Companys derivative
instruments on the accompanying consolidated financial statements, see Note 6 Financial
Instruments and Fair Value of the Notes to Consolidated Financial Statements.
The Company is also exposed to some market risk through interest rates related to the
investment of our current cash and cash equivalents which totaled $146.3 million on June 30,
2011. These funds are generally invested in variable interest rate instruments in accordance
with the Companys investment policy. As such instruments mature and the funds are
reinvested, we are exposed to changes in market interest rates. This risk is mitigated by
managements ongoing evaluation of the best investment rates available for current and
noncurrent high quality investments. If market interest rates were to increase or decrease
immediately and uniformly by 100 basis points, the Companys annual interest income could
correspondingly increase or decrease by approximately $1.0 million.
In the past, the Company invested in interest-bearing short-term investments consisting
of investment-grade auction rate securities classified as available-for-sale. As a result of
the recent liquidity issues experienced in the global credit and capital markets, auctions for
investment grade securities held by the Company have failed. The auction rate securities
continue to pay interest in accordance with the terms of the underlying security; however,
liquidity will be limited until there is a successful auction or until such time as other
markets for these investments develop.
As of June 30, 2011, the Company holds auction rate securities, with underlying
tax-exempt municipal bonds that mature in 2030, that have a fair value of $6.6 million. Given
the current market conditions in the auction rate securities market, if the Company determines
that the fair value of these securities temporarily decreases by an additional 10%, the
Companys equity could correspondingly decrease by approximately $0.7 million. If it is
determined that the fair value of these securities is other-than-temporarily impaired by 10%,
the Company could record a loss on its Consolidated Statements of Operations of approximately
$0.7 million. For further discussion of the risks related to our auction rate securities, see
Note 6 Financial Instruments and Fair Value of the Notes to Consolidated Financial
Statements.
|
|
|
ITEM 4. |
|
Controls and Procedures. |
The Company, under the supervision and with the participation of management, including
the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the
Companys disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures were effective as of June 30,
2011 to ensure that information required to be disclosed in the reports filed or submitted
under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms,
and (ii) is accumulated and communicated to Company
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
29
There has been no change in the Companys internal control over financial reporting that
occurred during the three months ended June 30, 2011 that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial
reporting.
PART II. OTHER INFORMATION
|
|
|
ITEM 1. |
|
Legal Proceedings. |
From time to time, we are involved in litigation arising out of the Companys operations
in the ordinary course of business. We maintain liability insurance, including product
liability coverage, in amounts deemed adequate by management. To date, aggregate costs to us
for claims, including product liability actions, have not been material. However, an uninsured
or partially insured claim, or claim for which indemnification is not available, could have a
material adverse effect on the Companys financial condition or results of operations. We
believe that there are no claims or litigation pending, the outcome of which could have a
material adverse effect on the Companys financial position or results of operations. However,
due to the inherent uncertainty of litigation, there can be no assurance that the resolution
of any particular claim or proceeding would not have a material adverse effect on the
Companys financial condition or results of operations for the fiscal period in which such
resolution occurred.
While we attempt to identify, manage and mitigate risks and uncertainties associated with
our business to the extent practical under the circumstances, some level of risk and
uncertainty will always be present. Item 1A, Part I of our 2010 Annual Report on Form 10-K
(the 2010 Annual Report) describes some of the risks and uncertainties associated with our
business that have the potential to materially affect our business, financial condition or
results of operations.
There has been no material change in our risk factors disclosed in our 2010 Annual
Report.
|
|
|
ITEM 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
The Company did not make any unregistered sales of equity securities during the second
quarter of 2011.
The Company did not repurchase any shares of its Class A Common Stock or Class B Common
Stock during the second quarter of 2011.
|
|
|
ITEM 3. |
|
Defaults Upon Senior Securities. |
Not Applicable
|
|
|
ITEM 5. |
|
Other Information. |
Not Applicable
30
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
|
3.1 |
|
|
Restated Articles of Incorporation of Rush Enterprises, Inc.
(incorporated herein by reference to Exhibit 3.1 of the Companys
Quarterly Report on Form 10-Q (File No. 000-20797) for the quarter
ended June 30, 2008) |
|
|
|
|
|
|
3.2 |
|
|
Rush Enterprises, Inc. Amended and Restated Bylaws (incorporated
herein by reference to Exhibit 3.2 of the Companys Quarterly
Report on Form 10-Q (File No. 000-20797) filed for the quarter
ended June 30, 2009) |
|
|
|
|
|
|
10.1 |
+ |
|
Rush Enterprises, Inc. Amended and Restated 2006 Non-Employee
Director Stock Plan (incorporated herein by reference to Appendix
A of the Companys Definitive Proxy Statement on Schedule 14A,
filed with the Securities and Exchange Commission on April 6,
2011) |
|
|
|
|
|
|
31.1 |
* |
|
Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
* |
|
Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
** |
|
Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
** |
|
Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
101 |
*** |
|
The following materials from Rush Enterprises, Inc.s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2011, formatted
in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets as of June 30, 2011 and December 31, 2010; (ii)
Consolidated Statements of Income for the three and six months
ended June 30, 2011 and 2010; (iii) Consolidated Statements of
Cash Flows for the six months ended June 30, 2011 and 2010; and
(iv) Notes to Consolidated Financial Statements (tagged as blocks
of text). |
|
|
|
+ |
|
Management contract or compensatory plan or arrangement |
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
*** |
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101
hereto are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not
filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended,
and otherwise are not subject to liability under those sections. |
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
RUSH ENTERPRISES, INC.
|
|
Date: August 9, 2011 |
By: |
/S/ W.M. RUSTY RUSH
|
|
|
|
W.M. Rusty Rush |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
Date: August 9, 2011 |
By: |
/S/ STEVEN L. KELLER
|
|
|
|
Steven L. Keller |
|
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
|
32
EXHIBIT INDEX
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Title |
31.1
|
* |
|
Certification of CEO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2
|
* |
|
Certification of CFO pursuant to Rules 13a-14(a) and 15d-14(a)
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1
|
** |
|
Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2
|
** |
|
Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101
|
*** |
|
The following materials from Rush Enterprises, Inc.s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2011, formatted
in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets as of June 30, 2011 and December 31, 2010; (ii)
Consolidated Statements of Income for the three and six months
ended June 30, 2011 and 2010; (iii) Consolidated Statements of
Cash Flows for the six months ended June 30, 2011 and 2010; and
(iv) Notes to Consolidated Financial Statements (tagged as blocks
of text). |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
|
*** |
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101
hereto are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not
filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended,
and otherwise are not subject to liability under those sections. |
33
Exhibit 31.1
EXHIBIT 31.1
CERTIFICATION
I, W.M. Rusty Rush, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rush Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Date: August 9, 2011 |
By: |
/S/ W.M. RUSTY RUSH
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W.M. Rusty Rush |
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President and Chief Executive Officer
(Principal Executive Officer) |
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Exhibit 31.2
EXHIBIT 31.2
CERTIFICATION
I, Steven L. Keller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rush Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officers and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of registrants board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Date: August 9, 2011 |
By: |
/S/ STEVEN L. KELLER
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Steven L. Keller |
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Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) |
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Exhibit 32.1
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Rush Enterprises, Inc. (the Company) on
Form 10-Q for the period ended June 30, 2011, as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, W.M. Rusty Rush, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
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1. |
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The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and |
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2. |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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By: |
/S/ W.M. RUSTY RUSH
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Name: |
W.M. Rusty Rush |
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Title: |
President and Chief Executive Officer
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Date: |
August 9, 2011
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A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Rush Enterprises, Inc. (the Company) on
Form 10-Q for the period ended June 30, 2011, as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Steven L. Keller, Vice President and
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
|
The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and |
|
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2. |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
|
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By: |
/S/ STEVEN L. KELLER
|
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Name: |
Steven L. Keller |
|
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Title: |
Senior Vice President and Chief Financial
Officer
|
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Date: |
August 9, 2011
|
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A signed original of this written statement required by Section 906 has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.